21 Nov How and when to put property in a SMSF – Damian Collins
If you are considering putting property into a self managed superannuation fund, then you won’t want to miss the series of articles inside the latest edition of Your Investment Property magazine. We discuss the pros and cons with Damian Collins who’s quoted in this excellent series.
Kevin: One of the features inside Your Investment Property magazine in the latest edition is a really interesting series of articles about self-managed superannuation funds. This could, in fact, be the perfect vehicle for you to grow your property wealth portfolio in a smart and profitable way, but there are many complexities to be aware of and costly pitfalls to avoid.
Sarah Megginson, who is the editor of Your Investment Property magazine, has done a series of articles and spoken to a number of experts, one of whom is my next guest, Damian Collins.
Damian, welcome to the show. You say in the article that buying in a super fund is not for everyone. Why is that, Damian?
Damian: Kevin, super certainly does provide a lot of advantages for investing in property, but there are a lot of reasons why it isn’t for everyone. One of the most important ones for property investors to understand is that the super laws really limit what you can do with property in super. For example, we can only borrow to acquire an asset. If you want to develop that asset, you can’t do that through your super fund.
Certainly for most property investors, they get their equity from capital growth and that’s great, but in the super fund environment, you can’t really leverage against that growth. So, if the property grows from $500,000 to $1 million, that’s fantastic, but you can’t actually leverage against that growth to buy another property.
I find for most of our clients, they tend to be in their 50s or late 40s and buying one in their super with the goal to pay down the debt over time, and by the time they get to retirement, they have an asset that has no debt and hopefully giving them an income stream coming out of their super fund tax-free.
Kevin: You’ve given us a couple of the great benefits there. What are the other benefits you see of investing in a super fund?
Damian: There’s certainly the benefit that I mentioned, the fact that if you buy the property in super and you salary-sacrifice, effectively you’re getting a tax deduction for paying into your super fund, and that can be used to pay down the principal on the loan as well as the interest costs. And then, if you structure it correctly in your retirement phase, the sale of the asset or even the ongoing income from that asset can be tax-free. So, it certainly does provide a lot of powerful benefits for people who want to follow that strategy.
Another thing, too, is that the asset is protected in the super fund. For a lot of people, that may not be an issue, but if you’re a business owner, your asset in the super fund is protected.
It certainly does provide a lot of benefits, but generally most of the people looking at it are generally living in that 20-year time horizon towards retirement.
Kevin: You mentioned there about if you’re an investor and you’re a business owner. There are possibilities to buy your own business premises in your super fund as well, aren’t there?
Damian: There certainly are, and a lot of business owners do do that. I always recommend to the business owners that you want to make sure you’re going to be there for at least 10 to 15 years, because you still have an asset you have to deal with.
When you buy residential property, it’s called in-house property rules. You can’t use it for a beach house or a holiday home. You can’t use the asset at all for residential, but for commercial, there’s a special exemption for that, so you can buy your own commercial premises and rent it back.
It all has to be above board at market rents, but we find that for a lot of business owners, it’s a great way to pay rent to themselves effectively, and then it’s in that tax-free environment within superannuation. So, for the right business owner who’s going to be there for a long time, it certainly does make sense to have a look at it.
Kevin: You’ve pointed out a couple of the great benefits there. There are obviously some risks involved in this as well, and I think you touched on one there: not being able to live in the property. I’ve heard of some people who’ve purchased properties in their super fund, and then either lived in them or rented them out to family members. That’s a bit of a no-no, isn’t it?
Damian: It definitely is, Kevin. There’s the in-house asset rule, and you’re only allowed to have 5% of your total assets, and for most people, a property is going to be way more than 5% of their total assets in that fund. So, yes, you definitely cannot.
You can’t look at this as a way to get a beach house or a holiday home or “I think I’ll put my family in there.” You can’t do that. With residential, you have to have it completely at arm’s length. So, certainly that’s where there’s risk, and if you get penalized, you could be up for substantial penalties.
One of the bigger risks people want to think about is… Look, I love property and I’m sure the listeners love property and the readers love property, but you have to sometimes think about diversification. If you have your home and you have three or four investment properties outside super, maybe you want to think about diversification.
The big challenge with a property in a super fund is if you get to retirement phase, you have to have a minimum pension drawdown and often that asset is maybe not generating enough income. And it’s a fairly lumpy and concentrated asset within the super fund.
So, all those things need to be taken into account. And in terms of your overall retirement planning, I certainly think property is a great strategy, but I do have a little bit of assets in other classes just for that diversification. I think that’s something people need to be aware of for real.
Kevin: Damian, thank you so much for your time, and I look forward to catching up again soon.
Damian: Pleasure, Kevin.